As part of our ongoing series exploring short-term rental metrics, this blog post takes a deep dive into Average Daily Rate (ADR) and Revenue per Available Rental (RevPAR). We’ll discuss how they’re calculated and how to leverage them whether you’re a vacation rental host, a large-scale property manager, or a seasoned real estate manager.
Average Daily Rate (ADR)
One of the first questions prospective hosts usually ask is, “How much can I charge for my vacation rental?” Pricing is an important topic for hosts, property managers, and real estate investors alike, and ADR is a way to analyze it.
ADR measures the average daily rate paid by the guest during the length of the reservation. It is calculated by dividing the total revenue earned by the host for the entire reservation by the number of booked nights.
At AirDNA, we define revenue as the sum of the nightly rates in the calendar during the days booked, plus the cleaning fee spread across the length of the reservation. The calculation looks like this:
Total Revenue (Daily Rates + Cleaning Fee) / Number of Booked Nights
Example: 5-day reservation
If the daily rate is $200, and a 5-day reservation took place, and the cleaning fee is $100, then the total revenue would be $1,100. The ADR would therefore be $220.
Example: 1-day reservation
If the daily rate is $200, and a 1-day reservation took place, and the cleaning fee is $100, then the total revenue would be $300. The ADR would therefore be $300.
The impacts of pricing strategies, marketing campaigns, and capital improvements can be measured by tracking improvements of a vacation rental’s ADR over time, as well as benchmarking it against the aggregate ADR of similar vacation rentals in the area.
Although ADR provides valuable insight, it is not a sufficient indicator of overall performance and should not be managed in isolation. Take, for example, a vacation rental whose ADR increased month-over-month but occupancy dropped, resulting in lower total revenue.
For those looking to maximize vacation rental revenue, pricing should be proactively managed in accordance with fluctuating demand. In AirDNA’s MarketMinder product, market seasonality and booking lead time indicators help property managers and hosts set more intuitive pricing by providing historical market RevPAR and future market demand. Managing and analyzing ADR within the context of occupancy is the best approach for those seeking to gain an edge over the competition.
Revenue per Available Rental (RevPAR)
There are two main competing schools of thought on how to boost vacation rental revenue:
- Lower the daily rate to encourage higher occupancy
- Maintain a higher ADR even if it means sacrificing on occupancy
Regardless of which strategy is chosen, there is general agreement on how to measure their combined impact: Revenue Per Available Rental (RevPAR). AirDNA provides two versions of RevPAR, and which one you use depends on what you’re trying to accomplish.
Two Versions of RevPAR
The RevPAR calculation most commonly found in MarketMinder takes into account the entire available market.
By contrast, in all offline AirDNA reports geared towards industry professionals (tourism boards, vacation rental managers, hoteliers, academics etc.) the RevPAR definition only takes into account genuinely active listings (i.e. listings that had at least one booked day in the month).
A breakdown of how each definition is used is detailed below:
Revenue Per Available Rental (RevPAR)
|Market Level||Total Revenue / Number of Available Listings|
|Property Level||ADR * Occupancy|
Example: Market-level RevPAR
If the total monthly revenue (daily rates + cleaning fees) for all available listings is $200,000 and there are 100 active listings, then RevPAR would be $2,000.
Example: Property-level RevPAR
If the calculated ADR is $120 and the calculated Occupancy is 80%, then RevPAR would be $96.
Hosts and real estate investors using MarketMinder are most interested in a broad view of revenue, and want to understand vacation rental revenue on a per-rental basis. This RevPAR calculation spreads total Revenue evenly across all available listings, enabling users to research and benchmark against the average revenue per listing.
Tourism boards and large-scale property managers have historically used hotel data to track lodging supply and demand in an area. Traditional hotel RevPAR is calculated by multiplying ADR by occupancy.
By providing this calculation, users get a version of RevPAR that more closely aligns with other data they are using. This allows them to review hotel and vacation rental RevPAR, for a more holistic view of lodging supply and demand in their market.
There are competing theories on whether ADR or occupancy drives RevPAR. Some research on the traditional lodging side has shown ADR to be the main driver.
On the other hand, some user feedback of Airbnb’s Smart Pricing tool, which automatically sets daily pricing for listings, seems to be that the tool errs on the lower side of ADR (often at or near the lowest-allowed price set by hosts), in order to boost the number of bookings.
AirDNA’s methodology and accuracy
At AirDNA, our mission is to be the most-trusted global provider of diversified private accommodation data.
With our combined years of industry experience, we have developed methods for calculating vacation rental ADR and RevPAR that best reflect their intended use and what’s actually happening in the marketplace.
Independent analysis has consistently shown the accuracy of AirDNA’s data to be unparalleled. Global real estate services and investment firm, CBRE, relies on our vacation rental data and has consistently found AirDNA’s margin of error to be less than two per cent. Through hundreds of data partnerships, we continue to refine and strengthen the data made available to our clients through our suite of online products and reporting tools.